31 May 2022
The High Court recently refused permission for members of a pension fund to bring a so-called "multiple derivative claim" which alleged (among other things) that directors of the fund's trustee were in breach of their duty to promote the success of the trustee company due to failure to implement an immediate plan for divestment from fossil fuel-related investments.
In McGaughey v Universities Superannuation Scheme Limited (USSL) the claimants, a university reader and senior research fellow, sought permission to bring a multiple derivative claim against the directors of USSL, the corporate trustee of their pension scheme.
The case is interesting because it applies the common law principles for multiple derivative claims, ie where the claimant is not a shareholder of the company on whose behalf the claim is brought. However, we find it particularly interesting due to the climate change angle.
The claimants said that while USSL took the view that climate change was a financial risk, the directors had failed to form any (adequate) plan of how to address that financial risk. Their continued investment in fossil fuels without a plan for divestment was, therefore, said to be in breach of their duties to act for proper purposes and to promote the success of the company (sections 171 and 172 of the Companies Act 2006).
They also argued that due to various other considerations (not necessarily relating to financial risk) such as the Paris Agreement and the results of a members' ethical investment survey, the directors were in breach of their s171 and 172 duties by failing to have an immediate plan to divest.
The primary argument was that the company had suffered (or would suffer) financial loss by its ongoing investment in fossil fuels, rather than that the company should divest for ethical reasons. The claimants relied on articles from the Financial Times and a study from Imperial College London as evidence that renewable energy portfolios have consistently performed better than fossil fuels. However, the claimants did not further particularise the loss said to have been suffered by the ongoing investment in fossil fuels.
USSL's response set out in detail how it had exercised its investment powers over the last 20 years, including the consideration given to climate change. It explained its view that immediate divestment was not necessarily the best way to achieve net zero. Instead, USSL said it had used its position as an investor to put pressure on companies such as Shell to take further action on climate change.
Leech J refused permission for the claim to continue. He was not satisfied that USSL had suffered any immediate financial loss because of the directors' failure to divest from fossil fuels. He also considered the directors' investment decisions were well within USSL's discretion.
He was not satisfied that the Court would be prepared to grant the declaratory relief sought, which was in somewhat vague terms, or that any useful purpose would be served by doing so.
This claim bears some similarities with the widely reported claim that ClientEarth has threatened to bring against the directors of Shell. If the ClientEarth case proceeds, we expect to see a much greater degree of particularisation of the loss ClientEarth says Shell will suffer by virtue of the board's current climate strategy.
Leech J's comments in this case will be of use to parties on both sides of similar claims in the future. Directors should note the weight that Leech J put on USSL's detailed evidence about how the directors had exercised their discretion, in particular the evidence that USSL had:
Reach out to a member of our Disputes & Investigations team if you want to know more about what this might mean for you.
by multiple authors